Understanding the Importance of Buy-Sell Agreements

Every year, businesses draw up strategies that will help them reach their three-year, five-year, and ten-year plans. Indeed, strategic planning is crucial to a corporation’s growth and prevalence in future markets. But being forward-focused also means thinking about every possible scenario a company can face. Business succession in the case of various circumstances is a real possibility, and one that a company must be prepared for.

Just as it is valuable for an individual to have a Will that will put his estate in order, so is it important for a shareholder agreement to exist between the owners of a company. A shareholder agreement is a legally binding document that puts the rights and obligations of shareholders in black and white. It also includes buy and sell provisions that allow for the orderly transfer of shares in cases of retirement, disability, death, bankruptcy, or matrimonial breakdown.

Should the buy and sell provisions of shareholder agreement be triggered, the transfer of shares should be facilitated smoothly through the said document. Shareholders need to know what happens next to a co-owners share—to whom it will be sold, and at what price. A buy-sell agreement may also be insured. In fact, insuring buy-out provisions is highly recommended by experts and financial planners. It is the most effective way to guarantee that there is money to purchase shares should a buy-sell event is triggered.

Three Methods for Life Insured Buy-Sell Arrangements at Death

Insuring buy-sell arrangements is a good decision and a wise investment for any company. It will usually require that each of the shareholders carry an insurance policy equal to the value of the person’s share.

There are two ways that the shares can be transferred upon a shareholder’s death. First, the buy-sell agreement can state that the surviving shareholders purchase the deceased’s shares. And second, it can also be that the corporation purchases the deceased’s shares.

Below are three methods for insured buy-sell arrangements upon a shareholder’s death:

Criss-Cross Purchase.The buy-sell agreement dictates that surviving shareholders can purchase the deceased’s shares. The insurance of each surviving shareholder shall guarantee the purchase. This method is also practiced without life insurance at times.

Promissory Note Method. It is the same as the Criss-Cross Purchase method. But instead of purchasing the shares in cash, the surviving shareholders may purchase the shares via promissory note.

Corporate Redemption. In this method, the corporation repurchases the shares of a deceased shareholder at the value computed accordingly by the shareholder agreement.